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[Risk of “Going Big”] Housing Market Goes Up, Down, Will Live Another Day

January 2, 2009 | 7:12 pm | |

On New Year’s Eve, we were surfing tv channels and saw the usual fodder of the Dick Clark-Carson Daly-Celebrities excited to be in Times Square-rock bands-yelling revelers-ball dropping-confetti falling expected festivities. My son wanted to watch the Robbie (son of Evel) Knievel jump on Fox so I acquiesced. Not to take anything away from Robbie Knievel but it was a routine, mundane boring type of jump. My expectations were a lot higher and a number of my friends had the same reaction.

Then we switched over to ESPN and saw another “Robbie” make a jump. Robbie Maddison made the most amazing motorcycle jump (actually 2) I have ever seen and, of course the up and down ramps symbolized the housing market pattern of the past several years (sorry I can’t help it). Please watch – it’s worth a look, I promise.

Last year he went the distance (322 feet).

Of course, the moral of the story is along the lines of, even with the sharp decline after the sharp incline, he, of course, lived. Notwithstanding that Robbie has to be insane. In his pre-jump interview, he was hoping young people learn from this by going big.

Trillions of dollars later, the financial system can’t afford to “go big”.

Happy New Year, everyone.



[Bloggingheads] Solutions To Crunch: Derivatives Are Derivative

October 14, 2008 | 12:29 am |

I like to check in with bloggingheads.tv periodically – the topics can get pretty abstract for my limited intellectual capacity, but every so often it strikes a chord and today was one of those days – I saw two clips that appealed to me (They caught my attention initially because I know and admire 3 of the 4 the participants). The two sessions were covering the “subprime” situation but seemed at odds about interpreting the risk of existing financial instruments. Great comments on these posts as well.

A commenter from Yves and Dan’s excellent but far too short “Slums of Greenwich, CT” writes:

An intereresting thing here was that the interlocutors implied that the shadow banking system, and here one suspects that they mean the derivatives market, poses greater risk to the financial system than do the poorly underwritten residential mortgages. This is the reverse of what the majority of people think. It makes sense to think that the greater risk is posed by the securities which underly derivatives, that the risk posed by derivatives is entirely derivative.

In the next segment, The Subprime Solution, Professor Shiller, who has been making the rounds with his recent book suggests we don’t “blame” anyone for the crisis and discusses his ideas for a solution – the devil seems to be in the details. In the background hovers his life’s work, the advocacy of a housing derivatives market to enable investors to manage risk.

Here’s a representative comment on the post:

I understand his work-out proposal, and insofar as it would remove some uncertainty and provide a mechanism to adjust nominal terms or contract-time expectations to unexpected situations I can see the appeal, but wouldn’t all of this be incorporated into the expectations of the lender, secondary purchasers, and buyer at the time of the contract? It seems like the plan would have to make mortgages more expensive (relative to today’s–or really yesterday’s market price) to the borrower and less attractive to the secondary market. If the new contract terms were fully incorporated into the mortgage price up front, how will this solve the problem; it seems like it would shrink the market for mortgage lending without affecting the asset bubble dynamics overall. Homeownership is extremely politically popular–how would Prof. Shiller counteract this fact, in his (correct) push to remove the many subsidies for home purchases?

A fun way to deliver commentary, bloggingheads is available as a download, but it’d be a lot easier if it was a videocast via itunes.


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[On Stage] The Real Deal Takes Lincoln Center

September 10, 2008 | 11:00 am | |

The 4th New Development Forum held by The Real Deal magazine, led by publisher Amir Korangy packed the house yet again, the second consecutive year the event was hosted at this venue.

Larry Silverstein, the storied developer and owner of the World Trade site, shared insight and his vision for the downtown market. After all, tomorrow is 9/11.

I was initially concerned because most of the panelists have commercial rather than residential real estate backgrounds. But they spoke in the context of both and it was very informative. I did miss Mark Zandi, founder of Economy.com whom I greatly admire for his analytical insights, who had to cancel at the last minute.

Stream of consciousness:

  • Amir, you are unable to think small. Congratulations once again for pulling off another one.
  • Stuart – I met your parents – don’t worry, I put in a good word.
  • Lauren – keep the web site going, but still call.
  • Brian – You’ve got the richest voice in business news television and can moderate with the best of them.
  • Cathy – the plum color worked – thanks for keeping me in my place.
  • Lock & Josh – Offering a great vehicle for listing advertising, better yet, Josh with a tie on (if Lock wore one = end of the world).
  • 30 second advertisement onstage before the event showed Bruce at C&W and me 120 times (at last count) on the big screen.
  • The best Real Deal bag yet – to replace last year’s model.
  • Happy that the audience was very supportive of the opening sponsors.
  • 3,000 attendees suggests real estate is not dead in New York, no?
  • I ran into my attorney at the show.
  • Larry taught us all the importance of cycles and taking the long view – and we knew he was right.
  • Larry thinks that luxury development prices, on an average sales price basis, will be higher next year than this year.
  • Bob emphasized segmentation and shared a 1% cap rate story. He knows his craft.
  • Steven was particularly articulate, being the first to be open about looming problems and answering my question about the new development pipeline.
  • Charles recently learned how to calculated IRR but probably has a higher IRR than hedge funds that live and die by formulas like cap rates.
  • Barbara continues to radiate – her marketing contrarianism can intrigue.
  • Don is looking at a $13M penthouse and was by far the most bullish on Manhattan – it’ll be back in a year?
  • Michael Shvo was at the event – he was the main draw card at the 2nd forum held at Cooper Square two years ago. That one sold out too.
  • Ran into a former dotcom era real estate development guy who lost millions (of other peoples money) but is doing very well now.
  • Paul, with beard, is itching to be a major player again in the brokerage business.
  • After asking my question to the panel, 2 people in line behind me told me I asked their question.
  • It is apparent that the audience has come to terms with the new market reality.
  • Don’t hold your breath, real estate is still first in the New York conversation.

And that’s the real deal.


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[The Real Deal Magazine] Will Own Lincoln Center

September 7, 2008 | 8:53 pm | | Public |

The Real Deal magazine’s New Development Forum at Lincoln Center was sold out at the 3,000 capacity venue last year. For lack of a better description, it was fun.

So this year, I was more than happy to help spread the word (all 3 seconds worth). The ad is running hourly on CNBC on Time Warner Cable and on NY1.

Since Publisher Amir Korangy knows how to pack content into his magazine, there’s no doubt he’ll pack ’em into Lincoln Center for another sell out. He lined up a group of interesting guests and with the housing and credit markets in turmoil, this event will prove especially informative.

To buy tickets


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[I Swear] What’s In A Condo Name?

July 8, 2008 | 9:20 am | |


Source: NASA

Its the originals versus the copiers. Its the creative versus the mundane. Its the celestial evangelists versus the card carrying masons.

The New York Times had a very lengthy article today, worthy of a real estate section lead story today on the naming of a new residential development. There has been a rash of new condo developments in New York that are named for stars (the celestial kind). In fact, there have been a rash of new condo developments…period. Theoretically, most have names so it is hard not to be confused.

There are developers who favor the “star name” concept and those who don’t. Each camp contends that their originality or beliefs are more effective in selling their product. Each seems to be bragging about how effective their strategy is.

Try proving a project name’s effectiveness with empirical data.

I remember speaking with an onsite broker at a Trump building in the late 1980s (when Trump, like most developers, fell on hard times) who shared her thoughts on the subject. She (I can’t remember her name) came up with the name for The Promenade, a mid-1980s project whose developer, Glick, later became overextended losing at least one project (The Horizon) to a lender, Chase.

She had come up with the name…

…back when real estate
was fun.

The NYT article sounded a bit like it originated from a PR pitch for the Ariel project in the Upper West Side to create awareness (that the name, ironically, did not seem to do) but it was a well written fun read.

I recall how overused the Starchitect label became in new development several years ago. Every project was associated with some individual that consumers were supposed to know.

I would guess that most consumers didn’t know the architect names before the marketing push and the overused effort numbed the consumer. Next: building names.

With so many projects coming on line these days, their names seem to blur together. I always prided myself in remembering the name and facade appearance of most of the 4,000+ Manhattan co-op and condo buildings in our own database (with this trivial skill I still can’t retain anyone’s name at a cocktail party or the capital of Sri Lanka).

Does a name matter? To some, I am sure it does.

How about names for feelings or emotions? “Aggravated”, “Impatient”, “Rushed”, “Annoyed”, “Panic”, “Confident”, “Rage”, “Bullish”, “Obnoxious” come to mind as potential choices.

Or better yet, how about swear words?

Heck no, families will live in those buildings.



[Move-ing Violation] After Sunny Skies, Chicken Little Sees His Shadow

May 8, 2008 | 12:01 am | |

It’s bad enough that the current NAR chief economist has made himself irrelevant by continues to say some crazy things about the housing market:

Two things homebuyers shouldn’t have to worry about is a recession or long-term credit crunch.

Yun, who admits that he has to balance empirical data with a role of advocacy for the housing market, said that while the beginning of 2008 has been weak so far, the second half of the year should see an uptick that could lead to home value growth of more than 20 percent in the next five years. “I think there is enough momentum to bring the buyers back into the market,” Yun said.

His adventures are well chronicled in Lawrence Yun Watch which followed the widely read David Lereah Watch who was his predecessor.

Now we are seeing the former cheerleader for NAR, David Lereah espousing negative views on housing.

David Lereah was the poster boy for all that was wrong with the housing boom. He wasn’t that subtle about spin, or perhaps an organization like his didn’t have the blogosphere to contend with before he came on the scene.

David Lereah moved on to Move and when they experienced problems, moved on to his startup Reecon Advisors, which provides advice to Wall Street. Interesting. Didn’t Wall Street read the newspapers during the housing boom? What advice are they looking for?

I guess the only point to this post is that I find it amazing that someone, who is so smart and articulate, take the dubious path that he took, and still be able to sell books and be paid for advice, which contrasts what he doled out for years with NAR and apparently trained his successor well.

I have so much to learn.


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Paulson Proposes Principles-based Instead Of Rules-based Approach

May 5, 2008 | 12:20 am |


It’s About Soccer, Not Football

Chalking this up to weird timing, but Treasury Secretary Paulson announced plans a few weeks ago to fix the financial markets. It would take a long time to legislate and would not likely be completed before President Bush finishes up his term. What the housing market really needed back then, was leadership on solutions covering the immediate problems such as the lack of credit availability or liquidity and a US economy teetering towards a recession.

In James Surowiecki’s excellent Parsing Paulson piece in the New Yorker, he notes:

As the press has noted, the plan would consolidate our myriad and overlapping regulators into fewer, bigger ones. But the most interesting thing about it is something subtler: a push to move from our current system of regulation—often known as “rules-based”—toward a “principles-based” approach. In a rules-based system, lawmakers and regulators try to prescribe in great detail exactly what companies must and must not do to meet their obligations to shareholders and clients. In principles-based systems, which are more common in the U.K. and elsewhere in Europe, regulators worry less about dotted “i”s and crossed “t”s, and instead evaluate companies’ behavior according to broad principles; the U.K.’s Financial Services Authority has eleven such principles, which are often deliberately vague (“A firm must observe proper standards of market conduct”). This approach gives companies more leeway in dealing with investors and customers—not every company needs to follow the same rules on, say, financial reporting—but it also gives regulators more leeway in judging whether a company is really acting in the best interests of shareholders and consumers.

Football (Rules-based)
In a rules-based environment like Wall Street has now, there a lot of rules that the financial institutions must follow and the regulators enforce the rules. Football, like most American sports, is heavily rule-bound. There’s an elaborate rulebook that sharply limits what players can and can’t do (down to where they have to stand on the field), and its dictates are followed with great care.

Soccer (Principles-based)
The regulators have more authority to interpret and pass judgement on the activities of Wall Street. Soccer is a more principles-based game. There are fewer rules, and the referee is given far more authority than officials in most American sports to interpret them and to shape game play and outcomes. For instance, a soccer referee keeps the game time, and at game’s end has the discretion to add as many or as few minutes of extra time as he deems necessary. There’s also less obsession with precision—players making a free kick or throw-in don’t have to pinpoint exactly where it should be taken from. As long as it’s in the general vicinity of the right spot, it’s O.K.

Not surprisingly, Wall Street favors the principles-based approach rather than rules based (it’s likely to be less complex and less onerous to comply with). Paulson is an ex-Wall Streeter.

Aside
In Newsweek, one of Henry Paulson’s top Treasury Department aides spoke on how United States and world policymakers are responding to the fallout of the global credit crunch.

The short answer is that we are in the midst of a phenomenon painfully familiar to Americans. From the gold rush to the Internet bubble, cycles of innovation, excess, adaptation and recovery to a point of even greater prosperity have defined America’s economic progress. In the present situation, we are seeing the rough edges of the same recent financial innovation that has brought enormous benefits to many investors, businesses and consumers. But these net benefits are of little consolation to the Americans whose lives are being seriously disrupted by the current financial-market turmoil. In response, policymakers in the United States and around the world are taking aggressive and targeted actions to stabilize financial markets, reduce the impact of markets on the U.S. economy and protect against the same mistakes’ being repeated.

blah, blah, blah

But now, focus is shifting to correcting the problems on Wall Street with the adaptation of successful new financial products. Thats where the new solutions to the credit crisis will get interesting.

As the immediate remedies take effect, we have also begun to focus on the weaknesses in business practices of financial institutions that this experience has revealed, and on fragmented U.S. and European regulatory structures that had difficulties guarding against or responding to modern challenges. U.S. and international policymakers are acting in a targeted but comprehensive way to address the causes of current market instability with steps including strengthening the oversight of risk management and reporting practices of global financial institutions; enhancing disclosure of and the process for setting values for complex products; changing and clarifying the role and use of credit ratings; strengthening the process by which national authorities monitor and respond to risk, and reforming the mortgage-origination process. In each of these broad categories, the specific proposals are concrete, widely accepted and, in a number of cases, already being implemented by national or international authorities as well as by the private sector.

Charting the source: Where news happens… or, more accurately, where news is reported from [Reuters]

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A Billion Dollar Home, With More Bathrooms To Clean

May 5, 2008 | 12:01 am | Public |

Matt Woolsey at Forbes.com covered the World’s First Billion-Dollar Home.

Here’s a tour with photos.


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[Indebtor’s Ball] Subprime Discussion Without The Junk

April 29, 2008 | 9:50 am | | Radio |

Lost a reliable Internet connection at home for the past 3 days so my posting has been non-existent (but I did change a few lightbulbs with my free time)

Back in the day, I loved to read books like Barbarians at the Gate, Den of Thieves and Liars Poker covering the truth and mythology of Wall Street (now I read books like Pontoon). Michael Milken was directly or indirectly connected to many of those stories, as well as the firm he worked for Drexel Birnham Lambert because of the financial vehicle he championed, the fabled junk bonds.

When the subprime crisis first became kitchen table talk last summer, initially there was discussion that it was another “junk bond” crisis. I cringed because junk bonds weren’t bad in and of themselves. The investors that used or purchased them got into trouble, because didn’t appreciate the risks associated with them. Higher returns, equals higher risk. Sounds a lot like subprime market participants doesn’t it?

Andrew Ross Sorkin’s excellent article in the New York Times today called Junk Bonds, Mortgages and Milken addresses this issue:

“The financial crisis we’re in today stems from the invention by Drexel Burnham Lambert of the junk bond,” Martin Lipton, the superlawyer who co-founded Wachtell, Lipton, Rosen & Katz, said derisively at a conference last month. “You can draw a straight line from Drexel Burnham to the financial world today.”

Milken disagrees:

Critics who compare the subprime debacle to the bubble in high-yield, high-risk corporate bonds that Drexel helped inflate two decades ago are “people who don’t understand markets very well,” Mr. Milken said. He suggests that “their rationale is that both types of financial instruments are risky.”

And he says junk bonds, or those rated below investment grade, “have little in common with mispriced subprime mortgages,” which he says are the real culprits.

“Having financed several of America’s largest home builders, I know a few things about the housing industry,” Mr. Milken said. “What happened to housing was not a failure of securitization, but rather a disastrous lowering of underwriting standards and other unfortunate practices.”

Criticizing securitization — the slicing and dicing of debt that he helped popularize — is “like condemning scalpels because a few unqualified surgeons have injured patients,” he said.

With the introduction of new financial instruments, users tend to go overboard at the end of the cycle and then new regulation is introduced that tends to go to far (ie mortgage current underwriting standards will become a self-fulfilling prophecy).

Ultimately what junk Bonds and subprime mortgages really had in common, were the people that used them. They didn’t reflect adequate risk into their pricing. A more pro-active SEC might keep that in check, but then squash innovation.

I need to change some more lightbulbs.


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A Market Still Shaken, Not Stirred, Except For The Talking Heads

January 26, 2008 | 11:39 pm | |

According to the Mortgage Bankers Association, there has been a surge in refi applications this week has resulted in a refi-boom. Mortgages rates are falling.

Its been a week since the Fed’s rate cut and we are already seeing reports that the market is stirring in some locations…although this strikes me as basically anecdotal-based reporting, no?

“Blood in the streets!” Ms. Gable said cheerfully. “That’s the best time to buy.”

This week, the average 30-year fixed rate was 5.48 percent; the rate was approaching 7 percent as recently as last summer.

…At what point will buyers be compelled to act, thinking they are getting a price they can live with and a rate they do not want to miss?

One indisputable effect of the Fed action is a rise in refinancing applications, continuing a trend that started late last year.

Talking head hoopla…

It’s hard to understand the world clearly without watching The Daily Show. Here’s the recent appearance by CNN real estate show host Gerri Willis with Jon Stewart on Comedy Central. The whole clip is entertaining, but if you don’t have time, fast forward to the 5 minute mark to catch the talking head chatter (Barbara Corcoran?). Wow.


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[5% Holiday Update] Declining Markets Get Smaller Mortgages

December 24, 2007 | 5:58 pm |

One of the problems with lack of transparency, is that people…errr…don’t know what you are thinking. Just like the fact that I have been weak in my quantity of postings as of late. I can’t explain it, because, well, I got tired of being, uhhhh…transparent. Needless to say, I am again transparent, and even more superficial.

One of the rumors floating around the appraisal/mortgage world for the past few weeks, covers the topic of Fannie Mae’s restriction on loans in markets they designate as declining. It was even suggested that a restriction in one market versus another, suggests redlining. However, I don’t see that correlation.

but i digress…

In a market that is declining, Fannie Mae will have a 5% higher loan to value ratio so instead of requiring 20% down, it might be 25% if the local market is declining. So markets with average mortgage amounts below the $417,000 conforming limit, this could have quite an impact.

>Current home price trends indicate that home values continue to decline in many markets across the country. As a result, and based on our continued monitoring of loan performance, Fannie Mae is reinstating a policy to restrict the maximum loan-to-value (LTV) ratio and combined loan-to-value (CLTV) ratio for properties located within a declining market to five percentage points less than the maximum permitted for the selected mortgage product.

Notice the use of the word reinstating. This is a recurring theme in mortgage lending these days. Its not the introduction of new lending guidelines, its simply the enforcement of existing guidelines.

In theory, the appraiser gets to lead the way in determining declining markets (in sarcastic tone: shocking!, amazing!, incredible!)

>Fannie Mae strongly encourages lenders to use supplemental sources and tools to independently assess current housing trends, unless the appraisal indicates that the subject property is located within a declining market. When the appraisal notes that the subject property is in a declining market, the maximum financing policy must be applied. When the appraisal does not indicate that the subject property is located within a declining market, Fannie Mae strongly urges lenders to implement processes and apply supplemental sources and tools to validate current housing trends and not rely solely on the information reflected in the appraisal.

But the appraisal industry has been neutered so severely by the mortgage brokerage and mortgage lending industry with pressure to “play ball” that I am not confident the appraisal industry is able to have this responsibility in the first place until proper regulatory restrictions protecting appraisers are in place. No more than a small percentage (you know who you are) of appraisers would be brave enough to show a negative time adjustment for fear of losing a client. I hope recent enforcement actions by the NY Attorney General and the SEC will make a difference.

Still, its a prudent and thoughtful first step for Fannie Mae to take. One of the things that drove me crazy in prior periods of market decline, lenders would send out policy notices saying they would not allow negative time adjustments. We would argue back, saying that this was an underwriting issue and it was simply a matter of adjusting the loan to value ratio, not to mandate rose colored glasses and ear plugs for the eyes and ears of the lenders. We either dropped them as a client or they changed their mind.

The byproduct of this action in declining markets will likely be even lower sales volume via stricter credit, placing more price stress in already distressed markets.

I can’t help but see the irony here: the reduction of Fannie Mae’s loan to value criteria in declining markets could actually lead to more foreclosure volume and more exposure for lender’s collateral. But in the long run, its a prudent action.

This restriction in declining markets should never have been lifted in the first place. It is better for the stability of the lending system by re-introducing the concept of risk awareness to lending decisions.

Now thats a concept I think we can risk having.


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Legacy Turbulence: Irrational Book Advances

September 25, 2007 | 10:01 am | |

Hey I admit it, I bought the former Fed Chair Greenspan’s new book The Age of Turbulence on Monday, the first day it was available. Of course I bought as a birthday present for me, not to be opened for a few weeks when my maturity age of 17 clashes in screaming technicolor with my actual age, even louder than a rate cut. We have strict rules around my house. If I buy something under the pretense of it being a birthday present, its not to be opened until then.

Well its been a week and I have had some time to reflect on the events associated with the new book, before I have even read it.

What thought first comes to mind? Incredible timing. Who says you can’t time a market?

Announce a book the day before one of the most anticipated FOMC meetings in recent memory, support your successor, admit some flaws but no regrets, criticize the administration as well as both the Democrats and Republicans in Congress, acknowledge a housing market problem but keep your reputation in tact. Hey, the $8M advance needs to be earned.

All this gets you a number one ranking on Amazon.com, ahead of Water for Elephants, Playing for Pizza and Math Doesn’t Suck: How to Survive Middle-School Math Without Losing Your Mind or Breaking a Nail.

Since I admired Greenspan during his tenure, I can’t tell if the insight being provided during the media blitz is helpful in understanding how we got here, or merely spin.

Caroline Baum, one of my favorite columnists on Bloomberg sums it up nicely:

Greenspan, who reportedly received an advance of more than $8 million for this memoir, seems eager to stave off criticism for keeping short-term rates too low for too long in 2003 and 2004, stoking a housing bubble in the process. He was aware of reduced credit standards on subprime mortgage loans, he says, “but I believed then, as now, that the benefits of broadened home ownership are worth the risk.'”

That view is being challenged as the housing bubble deflates, delinquencies and foreclosures rise and financial losses mount. The reader is left wondering if a more introspective Greenspan, and one less interested in shaping his legacy, wouldn’t have found a regret or two along the way.

With a possible recession looming and housing on the downslide (a word?), I am experiencing my own personal turbulence and have officially added it to my economic vocabulary in addition to “contained”, “frothy” and “irrational exuberance”.


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